Investment Advice: The human side to investing in a 401(k) plan

Several years ago, I gave a presentation to a room full of trustees for retirement plans of firemen, policemen and other employees. Unfortunately this was during a similar market meltdown, and the angst in the room was infectious. Surprisingly, given the environment, the informal poll that I took at the conclusion of my talk showed that the trustees (who were incredibly smart and practical individuals) expected returns from their retirement portfolios over the next five years to remain at the pre-crash level.

While the types of plans individuals can depend on for retirement have changed, and Social Security seems to be a constant conversation, our emotional IQ (our awareness of emotions’ effect on decision-making) generally has not.

The landscape has generally changed from defined benefit retirement plans to plans that put market risk squarely on the shoulders of you and me, the participants (i.e. 401(k) plans). So with headlines like “2015 was the hardest year to make money in 78 years” or “U.S. Stocks Post Worst Annual Losses Since 2008”, it’s not surprising that our clients are attending more education meetings. In fact, our 401(k) support call center volume has doubled since November.

We all have habits that can get us into trouble financially. According to Richard Thaler’s book “Misbehaving,” loss aversion is one of the biggies. According to Thaler, losses have about twice the emotional impact of an equivalent gain. The risk to us, as participants, is failing to recognize this tendency and not taking appropriate risk in our retirement plans.

So what messages should participants hear in today’s global market environment?

Continue to save. If you work for an employer who offers a 401(k), continue to make contributions. If you are not participating, reconsider that decision. And remember, if your employer matches your contributions, it’s FREE money! If I put $1 in and my employer matches it with 50 cents, that alone is a 50 percent return on my tax deferred investment.

Time matters. The younger you start the better. The Trust Company founder, Sharon Pryse says, “we have worked with individuals who started saving for retirement in their 20s. By the time their children were in college, they had enough in the 401(k) that they could actually stop saving for a few years while they were paying for their children’s college educations.” The value of compounding over a long time period is powerful.

Don’t lose sight of your long term investment objective and risk tolerance. Even one of the best investors, Warren Buffett, has Berkshire Hathaway shares that were down over 12 percent last year. However, remember that over the long-term (25 years), the S&P 500 has returned 9.82% annually.

Don’t try to time the market! It is really hard to avoid this, especially when the news is so negative. But you must. Over the past 20 years a $10,000 portfolio invested in the S&P 500 grew to $48,250. If you tried to time the market, selling and then buying, and you missed 15 days each year, instead you would only have $18,840.

Managing and protecting your retirement savings is important. It is perfectly normal to be concerned, but you should not panic. Don’t let your emotional IQ get the best of you.

Andy Muldoon is a senior vice president of The Trust Company in Chattanooga and may be reached at amuldoon@thetrust.com or (423) 308-6834.